Public Bill Committee

[Mr. Joe Benton in the Chair]
FS 01 Financial Services Authority
FS 02 Financial Ombudsman Service
FS 03 Which?
FS 04 Age Concern and Help the Aged
FS 05 Personal Finance Education Group
FS 06 UK Shareholders Association

The Committee deliberated in private.

On resuming

Joe Benton: Good afternoon. First of all, may I remind members of the Committee and witnesses that we are bound by the deadline agreed this morning? That means that the first evidence session must end at 5.30 pm and the second at 7 pm. I hope that I do not have to interrupt Members or witnesses in mid-sentence, but I will do so if need be.
We will now hear evidence from the Bank of England, the Financial Services Authority, the Financial Services Compensation Scheme Ltd and the Financial Ombudsman Service Ltd. I welcome the witnesses to the meeting, and I wonder if you gentlemen would like to introduce yourselves.

John Footman: I am John Footman, and I am an executive director of the Bank of England. I am also the secretary of the Bank and the secretary of the financial stability committee.

Andrew Whittaker: My name is Andrew Whittaker. I am general counsel to the Financial Services Authority.

Alex Kuczynski: I am Alex Kuczynski, general counsel to the Financial Services Compensation Scheme.

David Thomas: I am David Thomas, and I am the interim chief ombudsman of the Financial Ombudsman Service.

Joe Benton: Thank you, gentlemen. I call on Mr. Mark Hoban to open the questions.

Q 5757

Mark Hoban: This morning we spent quite a lot of time talking about financial stability, and reflected on the fact that under the Banking Act 2009, the Bank of England was given the objective of financial stability. Under the Financial Services Bill, the FSA would be given the same objective. Will either John or Andrew say who they believe is responsible for financial stability? Who would take the lead role?

George Mudie: It is the one who speaks first.

John Footman: That is exactly what we were thinking. So Andrew will speak.

Andrew Whittaker: I think it will inevitably be a joint enterprise between the Treasury, the Bank and the FSA. Each of us has different levers available to us to take action in support of the financial stability objective. The aim of the Council for Financial Stability is to enable effective co-ordination of the different action by the different authorities.

John Footman: I absolutely agree with that. The aim of the Council for Financial Stability is to co-ordinate and bring some clarity to the questions that have been asked about the combined roles of the Bank, the FSA and the Treasury. We both prospectively will have an obligation that refers to financial stability. The Banks obligation is to contribute to the maintenance of financial stability. With the powers that we have, contribute to is what we can do. We cannot, on our own, deliver financial stability. It has to be a co-operative effort, and that is what the council and the co-operation between the FSA, the Bank and the Treasury is intended to achieve.

Q 58

Mark Hoban: But is there not a risk that we are no further forward with the new council than when we had the standing committee? In that committee, no one seemed to have formal responsibility for financial stability. Now, it appears that everyone has formal responsibility. How will the new arrangements make it better and more effective?

John Footman: I think it becomes clearer the more we explain how we can bring our individual powers and contributions to bear. Clearly, the FSA has the actual statutory responsibility for regulating the vast swathe of financial institutions in this country. We are involved in providing liquidity insurance, oversight of payment systems on a statutory basis, and what the Governor has referred to as the funeralsthe resolution authorityin the event of a bank failing or coming close to failure. The Treasury in turn has it own powers and responsibilities. I do not think you can say that a single person can bring together all those powers and co-ordinate them, but the council itself can, which is the intention of clause 1.

Andrew Whittaker: May I add to that? We, for our part, recognise that our role in relation to financial stability is, in some senses, a secondary one to the other authorities. If there were to be a disagreement as to what would be needed for financial stability, it is inconceivable that we would wish to second-guess the views of the other authorities in that respect. Our role is to contribute, but not primarily to lead the development of a financial stability strategy.

Q 59

Mark Hoban: Whose responsibility is it to lead the development of that strategy? If you are taking a secondary role, is it therefore the Bank or the Treasury?

John Footman: Each of us is required to produce a strategy. Under the Bill, the FSA is required to produce and deliver a strategy, to agree it with the Treasury and discuss it with the Council for Financial Stability in relation to its financial stability objective. That reflects the powers of the FSA and how the FSA will contribute. The Bank has already been asked under the Banking Act 2009 to deliver, and consulting the Treasury, the court to agree, a strategy for the Bank itself to contribute to financial stability, using its own powers.
All of us have to go through the process, first, to find what we mean by financial stability, which is often a debated subject and which we take to mean ensuring that the financial system contributes effectively and in a consistent and resilient way to the intermediation between savers and borrowers and in markets. We develop policies using our powers to help to ensure that, but contributing is what the Bank can do through its own measures. The co-ordinationoverall responsibilitymust lie with the council, as it has in the past when people have brought their powers together in the standing committee under the tripartite arrangements.

Q 60

Mark Hoban: Most commentators would say that the tripartite committee did not work very effectively. What guarantee is there that the new council will work more effectively, given that you, John, seem to be saying that the Bank makes a contribution and that Andrew is saying that the FSA has a secondary role? I am not clear that we are moving to a better place as a consequence of that in terms of clarifying who actually takes the lead on these matters.

John Footman: There will be more clarity about how the council works. If it has not already, the Treasury will publish a statement that will constitute its terms of reference and the way in which it operates. There will be transparency about at least some of its proceedings where confidentiality does not get in the way. There will be more accountability in the sense that people will see more of what is happening in the council than was the case in a standing committee, and that brings its own discipline.

Q 61

Mark Hoban: I am not sure that I am yet persuaded of that.

John Footman: I think that I am suggesting that it would be betterif not necessarily a guarantee.

Q 62

Mark Hoban: Do you think that there is someone who is first among equals in the three-way committee?

John Footman: The obvious answer is that only one person in that committee is directly accountable to Parliament, and that is the Chancellor.

Q 63

Colin Breed: There seems to be a surfeit of strategies and a deficit of responsibilities, but we remain to be convincedwe may well be in the fullness of timeabout the practicality of the new tripartite. When the Treasury Committee was in Europe last week, we interviewed at least one financial stability committee, which had agreed that the governor of the Central Bank would chair the tripartite. Why do you think that the Chancellor should be the one to be the chair?

Andrew Whittaker: If I may chip in, the obvious reason is that, as we have seen over the past couple of years, the kinds of issues that are at stake in relation to financial stability are ones that affect the economy of the country as a whole, both in terms of the impact on the real economy and the fiscal impact of any rescue package. That overriding stakeholder interest of the Government and the Chancellor is one that fully justifies that role in the tripartite.

Q 64

Colin Breed: I think that I accept that. What additional information or macro-prudential tools will be available to the new council that was not available to the old tripartite?

John Footman: There has been a debate to which the FSA and the Bank have both now contributedthrough the Turner report and the Banks paper on macro-prudential supervisionon the macro-prudential tools and the possible uses of alternative ways of influencing macro-prudential policy. However, we are still at the stage of thinking about the kinds of tools that would be used. The ones identified so far are essentially tools that are wielded by what you might call the micro-prudential regulators but used for slightly different purposesfor leaning against the credit cycle, as some people would put it.

Andrew Whittaker: My take is that the tricky issue is not lack of information or risk assessment, it is deciding how much importance to place on a range of different risks, all of which may be huge and unquantifiable in terms of potential impact and likely incidence, and deciding against that background of a range of risks across the globe what action, if any, should be taken by the different members of the grouping.

Q 65

Colin Breed: So, it is not a lack of information, it is not a lack of risk assessment, it is a lack of action.

Andrew Whittaker: I would say that it is the inevitable difficulty in deciding what action if any to take when you have a range of different risks, any one of which may prove to be either highly significant or completely illusory.

Q 66

Colin Breed: Do you accept that the tripartite partners come from three very different spheres: one is a regulator, one a central bank and one a politician. What is the likelihood that they will always agree?

Andrew Whittaker: It is positively helpful that each comes from a different sphere of responsibility and area of interest. We as a regulator have our regulatory responsibilities and, hopefully, insights into how the industry operates. The Bank has its wider economic standing and the Chancellor brings to the picture a sense of the politics of what is acceptable and the intergovernmental side. They have a common interest in the new council in producing the right outcome. Actually, that diversity of opinion and communality of interest ought to provide a good result.

Colin Breed: How do you see the Council for Financial Stability working with the Monetary Policy Committee?

John Footman: They have different objectives. The Monetary Policy Committee is focused on monetary stabilitycurrently an inflation objective set for it by the Chancellorand it uses tools, essentially the interest rate tool but more recently quantitative tools, in order to achieve that. The Council for Financial Stability is addressing a completely different question. The objectives are related in the sense that financial instability makes it less easy to manage a monetary policy, but they are different and it would be quite wrong to confuse how the tools were used and the objectives.

Colin Breed: So, those two organisations will work entirely independently of each other in a silo mentality.

John Footman: They do not work in a silo mentality. The Monetary Policy Committee, after all, has a Treasury observer present on it, and so does the Banks financial stability committee. The attention of the Treasury observer is principally, apart from informing the Treasury, to enable the Treasury to inform the Monetary Policy Committee about fiscal policy. When the committee was first formed, there was a question about how fiscal policy and monetary policy were to co-ordinate. Clearly the principalsthe Chancellor, the Governor, the chairman of the FSAare involved in at least two if not three of the different functions: fiscal, monetary and financial stability. The council is bringing together the people who take the decisions across the whole range of monetary and financial policy.

Q 67

Mark Todd: The FSA currently has responsibility for financial education. The Bill sets up the consumer financial education bodyalthough I am sure that will not be its title eventually. Will that mean that the FSA will cease to have a responsibility for financial education? The relationship that the FSA will have with the new body is not entirely clear, since the FSA has responsibility for setting it up.

Andrew Whittaker: Thank you for asking that question. I think that you are right that one continuing relationship and role in relation to financial education will be through our involvement in the governance mechanisms for that new body. It is also the case that, inevitably, from time to time we may come across particular issues as a regulator that we think need to be publicly known. For example, a number of years ago we warned about the dangers involved in precipice bonds and it is conceivable that there may still be issues of that kind to which we will want to alert the public directly. I am clear that it is designed to be a single financial education body, just as we are designed to be a single regulator. We will hand over our financial education work lock, stock and barrel to the new body.

Q 68

Mark Todd: You touched on governance, what governance model has been decided on for the new body?

Andrew Whittaker: The governance model is perhaps best described as being based on that used for the Financial Ombudsman Service and the Financial Services Compensation Scheme, both of which are represented at the table today.

Q 69

Mark Todd: Perhaps they can enlighten us. I am interested in the kind of people or bodies that would be represented on the body and what responsibility they may have within it.

Alex Kuczynski: I can only speak for the Financial Services Compensation Scheme. In terms of our present governance and accountability arrangements, we are established under the Financial Services and Markets Act 2000. There is a scheme manager. We are a limited company, limited by guarantee. We have a combination of executive and non-executive directors. The non-executive directors are public interest appointments. They are not appointed to represent particular constituencies or interests. We are accountable to the FSA in our operations. We provide annual reports and other reporting

Q 70

Mark Todd: So there is an accountability link.

Alex Kuczynski: There is, but the decision-making is independent, so operationally we are independent from, but accountable to, the FSA.

David Thomas: The position in the Financial Ombudsman Service is similar but not identical. The Financial Services Authority appoints our directors, an annual report is made to it and it also approves our budget. We are slightly unusual in that we are a quasi-judicial body. The ombudsmen are deciding cases and are, therefore, not members of the board.

Q 71

Mark Todd: That line of questioning has not left me a huge amount the wiser. Where does budget setting lie within the new body. We heard about one model there. Would it lie with the FSA? Where would it lie?

Andrew Whittaker: May I suggest that we write to you on that specific point? As we speak, I notice that schedule 1, paragraph 7 indicates that the body is to adopt its own annual budget, which the FSA is to approve.

Q 72

Mark Todd: So it is approved by the FSA. On the appointment process, we have a model in which the appointment is through the FSA and a model in which it is through, presumably, public advertisement. Which model will be followed?

Andrew Whittaker: The model is set out in the schedule to which I directed your attention a moment ago. Paragraph 2 states that the members of the board are to be appointed by and liable to removal by the FSA.

Q 73

Mark Todd: So the FSA still has a pretty active role in this. You distanced yourself somewhat on the first question, but you are firmly stuck into it by appointing the people and setting its budget.

Andrew Whittaker: We have roles in relation to the body in appointing its board and in approving its budget. That is the same for the other organisations represented here, but they operate independently, and it is my expectation that it will be the same in relation to this case. They are not appointed as representatives of the FSA; they are appointed according to paragraph 2(3) on terms designed to secure their independence from the FSA.

Alex Kuczynski: If I could just clarify one point, the members of the FSCS are appointed by the FSA.

Q 74

Mark Todd: So these are not public appointments through an open process?

Andrew Whittaker: They are appointments through an open process but the appointing body is the FSA.

Q 75

Mark Todd: So you would apply to the FSA for a nomination to this particular body?

Andrew Whittaker: There would be an advertisement.

Q 76

Mark Todd: With regard to the budget arrangements and the mechanism for raising sufficient money to pay for this body and its actions, the FSA is currently funded by levies of various kinds. Is that passed through to this body?

Andrew Whittaker: There is a mechanism for two sources of funding set out in the Bill. One source would be levies on the industry and another Government grant.

Q 77

Mark Todd: What sort of expertise would the FSA be seeking to draw into this body, bearing in mind that there are manyand I am one of themwho would criticise the FSA for how it has been carrying out this function on its own?

Andrew Whittaker: I am in danger of making comments that are likely to appear self-evident. We will be looking for people in whom we have confidence from a variety of different areas of expertise and who will be able to deliver the operational objectives of the new body.

Mark Todd: Yes, you did indeed do that. Thank you.

Q 78

Mark Hoban: Talking to the Financial Ombudsman Services and the FSCS, the FSA has power of appointment and you produce an annual report to it. How much involvement in practice does the FSA have in your day-to-day activities? Presumably, as a quasi-judicial body, the FOS has very little input from the FSA in its day-to-day activities. Does that also apply to the FSCS?

David Thomas: That is certainly correct in the case of the ombudsman service. Board members are appointed by the FSA on terms required to secure their independence. The ombudsmen are appointed by the FOS board on terms to secure their independence, so there are two levels there before you get to assigned cases.

Alex Kuczynski: Yes, a similar structure applies to FSCS. The directors are appointed on terms that secure their independence operationally from the FSA. Decision-making on claims for compensation is independent of the FSA but we do work closely with the FSA on issues of common interest. On the development of policy, there is a memorandum of understanding with the FSA. We do work closely with it but not in terms of making decisions for us.

Q 79

Mark Hoban: Mr. Whittaker, do you envisage that the FSA will operate at a similar arms length basis from the consumer body?

Andrew Whittaker: Yes, I do.

Q 80

John Howell: Before going on to some general consumer protection issues, I want to pick up a couple of points on the consumer financial education body. Do you not see a conflict between what the body might want to say about financial dealing and the duties it has in the Bill to maintain stability and confidence in UK financial markets? Does it go into this with its hands tied?

Andrew Whittaker: That is probably for me to answer. The essence of what people will gain from having an independent body of this kind is confidence in its independence. I expect that there would only be very rare occasions when the advice that it might be inclined to give could threaten financial stability. You might imagine, for example, that if it were worriedas people were a couple of years agoabout the financial position of Northern Rock, it would think twice about advising consumers to pull out their money, because of its obligation to take into account the impact on financial stability. I imagine that that kind of situation would be very rare indeed.

Q 81

John Howell: There is a question that follows on from that. We have the details of the consumer financial education body, but the one thing we do not have is an idea of what success would look like for that body. Do you have a view of what that would be?

Andrew Whittaker: I think that success in relation to consumer financial education, as we see it, will inevitably be something that is measurable primarily over longer periods. We did a baseline survey in March 2006 on the financial education position of the community at large at that time. We envisaged that making significant inroads into that could perhaps take a considerable number of years as people gradually became more aware of financial issues. I do not think there is any quick and easy way to measure the success of the body. We envisaged when we did that baseline survey in 2006 that perhaps after five, 10 or 15 years people would do a similar survey and try to get an impression of what had changed against that base line. Certainly, we envisaged it as being something where the real fruits would be measurable only after a period of years.

Q 82

John Howell: So in the meantime we are on a wing and prayer as to whether it is worth doing?

Andrew Whittaker: I think that you would probably be aware that we aim in the interim to measure the immediate deliverables of the body so that a particular task that it is undertaking, such as the pathfinder project, will be independently assessed by experts in the area. There are some measures. One is always slightly sceptical about measures of this kind in terms of penetration of schools with consumer education information. Those are perhaps secondary measures, but they are in an environment where what we are trying to measure ultimately can only be measured over a relatively long period. They are a substitute for the wing and a prayer that you envisage here.

Q 83

John Howell: Can I ask a question about the consumer redress schemes? One of the comments that have been made by others who have submitted evidence is that there may be a difficulty in ensuring that decisions are made only on consumer protection grounds. Is this a concern and how will you deal with it to make sure they are so made?

Andrew Whittaker: There are two sets of provisions on consumer redress in the Bill. One is about collective proceedings, which obviously involve a court-based process, and the other, which I think is the one you are primarily focused on, would involve a quasi-legislative process. This is a process that would be undertaken by rules. There would be a process of public consultation on those rules. We would be bound by the statutory objectives in the Bill in setting those rules. There are also a number of specific requirements about the approach that rules are to take, for example, on the extent to which they need to mirror what the courts would decide. However, inevitably, there will be judgments about the way in which those rules are formulated. I recognise that those judgments will leave some people saying, I would have got more if youd taken a different judgment.

Q 84

John Howell: May I pick up on the consultation aspect of that in relation to collective proceedings, because there were a number of complaints, particularly in the evidence submitted for Second Reading about the lack of consultation over the collective proceedings approach? Do you share the concern that there has been less consultation than there ought to be? Are there things that ought to be taken out or things that you would like to see put in?

Andrew Whittaker: In terms of consultation on the Bill, that is effectively a question for others. My recollection is that these provisions were mentioned in the White Paper, but I cannot confirm that formally without checking. In terms of the substance of the provisions, we are happy with them as they stand.

Q 85

Mark Hoban: May I pursue the issue of the consumer redress scheme? There are already plans in section 104 of FSMA for similar arrangements. Why are you seeking the removal of those powers and their replacement by the powers in this Bill?

Andrew Whittaker: As you say, there are provisions in section 404 of FSMA on this subject, but those powers have never been exercised. They involve quite a complex process of an assessment by the FSA, a report to the Treasury, and then a parliamentary process. This is a more direct process involving standard rule-making by the FSA. We think that it will be speedier and more flexible than the process that is currently in the legislation.

Q 86

Mark Hoban: In section 404(1)(b), it appears that there does not have to be legal action or a court case as a prelude to setting up this consumer redress scheme. How are you going to ensure that any scheme you set up will be free from legal challenge, either by consumer groups or by the industry?

Andrew Whittaker: You are absolutely right to identify that, in some of these cases, powerful interests will want to be able to challenge an approach that we would take that could involve them paying out large sums of money by way of consumer redress. We are required by this legislation to track what we think a court would be likely to decide. It would be possible to have a judicial review by any affected party on the basis that we had misdirected ourselves about what a court would be likely to decide. That will be quite a high hurdle for us to get over, and we will need to do our best to do so.

Q 87

Mark Hoban: The recent bank charges case, which involved the Office of Fair Trading rather than the FSA, went through several layers of judicial scrutiny. How can you be sure that the process you go through will be equivalent to, and as robust as, effectively appealing to the highest court in the land?

Andrew Whittaker: I think that the process we go through will be a different one from that which is used in court proceedings, where interested parties are represented by counsel acting in court, and there are a number of appeal mechanisms. In our case, we would have a legislative process, cost-benefit analysis, formal consultation and the scope for judicial reviewa judicial review that could be an appeal. That is different from a court process, and it is potentially contentious. We believe that it offers an alternative method of resolution that could be speedier and more efficient than a court process. It is also worth saying that a process of this kind could be useful after a court decision. If you envisage that the Supreme Court had decided the other way in relation to bank charges, you could still envisage that a process of this kind would be useful as a mechanism for organising the repayment or the redress.

Q 88

Mark Hoban: Mr. Thomas, presumably this would actually reduce the workload of the Financial Ombudsman Service, which at the moment seems to be the point of contact for most consumers when there is a systemic issue such as mortgage endowments or mis-selling? Are you content for this responsibility to pass to the FSA?

David Thomas: I am not sure that we see it as responsibility-passing. When FSMA talks about the ombudsman, the language is very much about doing what is appropriate in the circumstances of the individual case, and the whole design of the ombudsman model is based on looking at individual cases. As you will see from our written evidence, more than half the cases that we have dealt with since we were established relate to only six individual products. Deciding those many thousands of cases on a one-by-one basis, without being able to have regard to the more across-the-board economic and strategic issues that a regulator is able to have regard to, is a rather uncomfortable position for the ombudsman to be placed in and, indeed, on occasions we are accused of being a quasi-regulator in consequence of the number of cases we may be deciding in a particular area.

Q 89

Celia Barlow: I am particularly interested in addressing my question to Mr. Alex Kuczynski. How do you think the banking sector will react to the proposal in the Bill that the Financial Services Compensation Scheme pay for the cost of activity up front under the special resolution regime, then gets it back from the banks?

Alex Kuczynski: The Banking Act 2009, which came into force earlier this year, allows for two options for contributing to the cost of resolution through the FSCS, which can either be at the point of resolution or at the end of the resolution. In the one example that has been dealt with under the new legislationDunfermline building societythe arrangements invoked by the notice from the Treasury were for a contribution at the end of the resolution process. Once the Bills authority has been resolved, there could be a contribution from FSCS at that point. I am not sure that there is any great change under the proposals in this Bill to that contribution. These proposals deal primarily with the interest attached to those costs, rather than the prospect of the banks and the financial services sector contributing before or at the end of the resolution process.

Andrew Whittaker: Perhaps I could chip in as well. I imagine that anything to do with the costs of the financial compensation scheme is likely to be a sensitive issue with those who will be paying the costs. However, there is an important safeguard in the legislation, which is that the amount that can be paid by way of the costs of handling a special resolution is limited to the amount that would have been paid if the company concerned had gone into insolvent liquidation and compensation had had to be paid.

Alex Kuczynski: Less the recoveries that we would have received.

Q 90

Celia Barlow: Do you think that this will affect your relationship with the banking sector? You felt that there would not be that much change, but in so far as there is change, how will it affect your relationship?

Alex Kuczynski: On behalf of the FSCS, I hope that it would not affect it. We want to encourage a strong relationship with the industry, either directly or through their trade organisations. We have regular meetings with trade bodies to talk about their concerns, the position of the FSCS, and their exposure through the levy. We meet not just the banking sector but all sectors of the financial services industry. We try to keep them up to date with when and what they might be asked to contribute from time to time. I hope that that will continue.

Q 91

William Bain: Andrew, in terms of the memorandum that the FSA has submitted, particularly on enforcement, are there specific examples of additional powers in the Bill that would allow you to continue the strategy that you referred to as credible deterrence by preventing further wrongdoing?

Andrew Whittaker: Yes, indeed there are. There are provisions that enable us to disqualify people as a penalty rather than merely for prevention. There are provisions that enable us to take both fining action and withdrawal-of-authorisation action and a number of other provisions detailed in the Bill.

Mark Hoban: There is a significant increase in your powers in the provisions on disciplinary powers. What has given rise to your demand for such powers? What circumstances have you identified, which you could not address in the recent financial crisis, that those powers will enable you to address?

Andrew Whittaker: I would draw a distinction between powers that were needed in a financial crisis and powers that are needed as a result of the more intrusive approach to regulation that we have taken over the past two years. In the course of the financial crisis, those particular enforcement powers were not as significant, because such powers tend to be used after the event rather in the heat of a crisis. The enforcement powers arise out of the determination of the FSA over the past two years to be a more effective supervisor than perhaps it was in the past, and to have a credible deterrent effect on the industrys conduct. These are part and parcel of that more credible deterrent effect, rather than directly being powers that were needed in the crisis.

Q 92

Andrew Tyrie: I would like to return to the issue of the Council for Financial Stability and address two questions that have already been raised. First, who is in charge of the council? May I summarise what I think I heard at the beginning, then perhaps Mr. Footman or Mr. Whittaker could tell me whether I have got it wrong? The FSA is to have a secondary role, the Bank of England is to have a full role, and the Chancellor is to have a lead role as the only elected politician. Have I got that right and, if not, could you correct me where I have not got it right?

Andrew Whittaker: I would say that, as a high-level summary, that is probably a fair reflection of what we said. We could all add more detail and qualify it in particular ways, but I would say that we were particularly emphasising a secondary role in relation to macro-prudential issues.

Q 93

Andrew Tyrie: Which is what we are talking about here?

Andrew Whittaker: Yes.

Q 94

Andrew Tyrie: So that is creating a hierarchy of responsibility in this committee, is it not?

Andrew Whittaker: John will no doubt come in on that in a moment. You need to reflect on the fact that what you have here are three bodies. Each has its own responsibilities.

Q 95

Andrew Tyrie: We understand that, it is just this question: there is this hierarchy, is there not? We have got somebody with a secondary role and we have got someone with a lead role. That sounds like a hierarchy to me. Are we happy to agree with that, or not?

John Footman: I have not seen it as a one, two, three hierarchy. I have seen it as three bodies with particular powers, and the Chancellor chairing it for the obvious reason that, as I said, he is the person who is accountable to Parliament for the operation. His is the sponsoring Department for the FSA

Andrew Tyrie: But he has a lead role

John Footman: He is the shareholder in the Bank of England and he has a leading role in this body. I remember the question that was asked in the Treasury Committee two years agoWho is in charge; who was in charge?and this is an attempt to answer that question. He always chaired the standing committee; he chairs this.

Q 96

Andrew Tyrie: I think we would agree that it would be impossible to have somebody with a secondary role and somebody with a lead role, without arguing that some hierarchy has now been created between those characters.

Andrew Whittaker: We would probably put it in different terms. We would probably say that each has its own role and we respect the roles of the others. For our part, in relation to financial stabilitynot in relation to regulation generally, but in relation to financial stabilitywe accept that we do not have the lead role.

Q 97

Andrew Tyrie: Thank you. Clearly, the word hierarchy is causing a lot of trouble. Why do I not replace it by saying that the relationship between these parties is not equal? Would you agree with that?

Andrew Whittaker: Again, we would say that in many respects it is equal. They treat each other as equals. The particular point I made on financial stability was that, in relation to that particular function, we see our role as being

Q 98

Andrew Tyrie: Do you think it is possible for somebody in a secondary role and somebody in the same committee in a lead role to have equal roles?

John Footman: I am confused about roles.

Q 99

Andrew Tyrie: I am only quoting back what you quoted to us so, if you are confused, I am afraid it is only all of us who have been confused by your evidence.

John Footman: Let me try again to unconfuse. This is a committee that co-ordinates between two particular bodies to whom powers have been delegated by a statute, and the Treasury, which is the co-sponsoring Department for both. The Chancellor chairs it and it is an attempt to bring together bodies whose powers are different, but which interact with one another.

Q 100

Andrew Tyrie: We know that, if I may say so. You have already said that, so we are aware of that. I am picking up two points that you have both given in evidence this afternoon. I am trying to relate the two of them and get a grip on how this body will work. I will give up on equality and hierarchy, since they both seem to be particular obstacles. Is the principle of a lead role for the Chancellor and a secondary role for the FSA set out anywhere in the draft statute?

Andrew Whittaker: In those terms, no.

Q 101

Andrew Tyrie: So how might we have been able to find out that important piece of information had it not been for a chance set of remarks in Committee this afternoon?

Andrew Whittaker: In relation to what I said, our position is broadly set out in the Turner report on the Bank of England.

Q 102

Andrew Tyrie: Basically, what we now have is a committee withalthough you do not like the word hierarchya clear line of different responsibilities between people, which puts someone in the lead and someone else in a secondary role, but that is not in the Bill. I will move on, but if I may say so, that sounds quite a mess.
Speaking of mess, I would like to come to the issue of powers and responsibilities in this feat. The Governor of the Bank set out, in front of this Committee, the current position on his statutory duties for financial stability. He said that he wanted to be absolutely crystal clear that we in Parliament understood that the Bank of England can do no more than publish reports or make speeches in fulfilment of its duty. He added that if we were content with that, that was fine by him, but what we cannot do would be to turn around afterwards and say, But you had the statutory responsibility. Why did you not do something? Is there any power given to the Bank of England in the Bill to try to deal with the Governors concern?

John Footman: I think he would have gone onif not in that quote that you used, then elsewhereto say that the Banking Act 2009 gave the Bank formal statutory responsibility for payment system oversight and a formal responsibility for bank resolution.

Q 103

Andrew Tyrie: Would the Governor tell me that those two new powers address his concern that powers and responsibilities are not aligned?

John Footman: In relation to those, we have powers set out in the 2009 Act. I think the Governor was making a broader point that in relation to financial stability as a whole, his responsibilities are to contribute, and his formal statutory powers are limited to the two that I have mentioned.

Q 104

Andrew Tyrie: Are powers and responsibilities now aligned to the satisfaction of the Bank of England under the Bill?

John Footman: We have one reservation on specific clauses in the Bill on the resolution plans, which I have mentioned in the note that I sent to the Committee. I do not know whether you want me to expand on that.

Q 105

Andrew Tyrie: No. My question is on the issue of fulfilment of your duty for delivering financial stability. In respect of your statutory duty to deliver financial stability, is the Bank now content that the powers and responsibilities, which were not aligned, are now aligned?

John Footman: I stress again that our responsibility is to contribute to, within the powers we have, the maintenance of financial stability. Our responsibility set out in the 2009 Act is not to deliver financial stability, and it cannot be, for the reason that you have given.

Q 106

Andrew Tyrie: So when the Governor comes before us on the next occasion in the Treasury Committee, on which I serve, we will ask him that question, and you are confident that he will say, I am happy now; I am content.

John Footman: No. He will say again, and he is absolutely right

Q 107

Andrew Tyrie: He will say that he is not content?

John Footman: I am not sure about contentedness. It is a simple point: on financial stability, we are expected to contribute, not deliver it. We have certain powers through which we will contribute, but we cannot contribute through other powers, because we do not have them. It is not a question of our being cross that we do not have them; it is just a fact that we do not have them.

Q 108

Andrew Tyrie: The Governor went on to agree that this whole area is a mess and, as a result, the Treasury Select Committee concluded:
Where responsibility lies for strategic decisions and executive action was, and remains, a muddle...The biggest failures of the Tripartites handling of Northern Rock were that it was not clear who was in charge, and, because the Tripartite took a minimalist view of their respective responsibilities, necessary actions fell between three stools. We are not confident that this issue has yet been adequately resolved.
Are you saying that these have now been adequately resolved, Mr. Footman?

John Footman: In relation to the co-ordination between the three members of the tripartite, the first clause of the Bill is a serious attempt to clarify how the relationship works and to resolve it.

Andrew Tyrie: Thank you.

Q 109

Lindsay Roy: I cannot agree with the hon. Gentleman that we are talking about a chance set of remarks. They were made quite deliberately to highlight the issues. Whatever the relationshipwhether it is a hierarchy or whether there is parityit needs to be teased out further; it is a complex set-up. Can you summarise for me the key benchmarks by which we could gauge more effective working and success through the Council for Financial Stability? What key things would summarise that for us? Mention was made of openness. What else?

John Footman: This is a body to co-ordinate, and one measure would be whether we appear, either in normal times or in times of crises, to be co-ordinated and whether we think we are. Another measure is whether we speak with one voice or many voices. You keep hearing us speaking with many voices, even though Andrew and I think that we are speaking more or less with the same one. It is difficult for three people, all giving speeches in evidence, to say exactly the same words, but broadly we should be saying the same things, or approaching things in the same way. Those would be measures of success for a body that is there to co-ordinate, as it says in the Bill.

Andrew Whittaker: To add to Johns comments, the best way to see that a tripartite organisation is working is by what it produces. The members of the tripartite organisationthe Treasury, the Bank and the FSAhave worked very effectively in recent months and years on the asset protection scheme, on recapitalisation and, indeed, on some of the individual company decisions that we have needed to take.

Q 110

Lindsay Roy: Are there other things that you would add to that portfolio, in terms of success criteria?

Andrew Whittaker: If I may say so, it is always very difficult to conclude that financial stability has been successfully achieved. Although you may have a long period during which you do not have financial difficulties, concluding that financial stability has been achieved does not necessarily follow from the fact that you do not have problems. Financial stability in essence requires more than a period without difficulties. It requires confidence that mechanisms are in place to deter difficulties. As you do not know all the risks you are mitigating against, you will always need to be chary of anyone who tells you that the system is working as well as it can, and that we have it all sorted. There is always more that can be done. There are always better ways than the ones that we have achieved at the moment.

Q 111

Lindsay Roy: This may be somewhat ethereal, but operational confidence would be one of the factors.

Andrew Whittaker: Yes.

Lindsay Roy: Thanks very much.

Q 112

George Mudie: You have made me a bit happier than the Minister did this morning. I was unsure of where we were, in terms of who was responsible for financial stability and in terms of the role of the Chancellor. It is clear that the Chancellor is chairing the body and will take the decisions but, from what I have heard this afternoon, if you would only admit it, Mr. Footman, the FSA is the body that we shall look to in the future for financial stability. The Bank has a very minor role. It would be better for you to admit that, because if the FSA gets it wrong, you are clear of all the problems. If you continue to sit in a meeting and say, We are equal partners, you are an equal partner without responsibility. You can only take the rap, but cannot do anything about things. Am I wrong?

John Footman: If I may be allowed an observation, one of the lessons of the past two years is that even if we do not do banking supervision, we are still assumed widely to be responsible and are blamed. We have had that in spades at the Bank, 10 years after supervision moved elsewhere.
We are involved in financial stability, there is no question about that. We are involved in providing liquidity, and liquidity insurance, to the banking system through our operations. Those things are not based on statute, but on the operation of our balance sheet. We are also involved with statutory powers in the small ways that I mentioned. All of that we bring to the table in the Council for Financial Stability.
In terms of supervision, when it comes to statutory powers we are very small. Look at the bulk of the legislation and compare it with the Financial Services and Markets Act 2000, which relates to the FSA. However, we have an interest because: financial stability is the environment in which monetary policy operates; our balance sheet is used to provide liquidity insurance to the banking system; and we are involved in payment systems. All that gives us an interest in financial stabilitya direct operational interest.

Q 113

George Mudie: I am not sure where that leaves you.

John Footman: It leaves us therein the Council for Financial Stabilitybut as I said at the beginning, it also leaves us with a sense that whatever happens, we are to blame. If you ask a taxi driver who was to blame for anything, they would largely say, Well, its the Bank of England, innit? So we have carried quite a lot of the can for Northern Rock and other thingsbecause we are there.

Q 114

George Mudie: As I am being unkind to yousome would say thatlet me deal with the FSA and consumer protection. You reckon that the new body is independent of the FSA. If there was a country, and we from this country appointed its board, set up its budget, appointed its staff and appointed a reviewer to determine how well it spent its money, would you call that country independent?

Andrew Whittaker: I was not making comments about any country; I was talking about the consumer financial education body.

Q 115

George Mudie: I understand that. Let us take the education body; are you saying that it is independent of the FSA?

Andrew Whittaker: Yes.

George Mudie: You appoint its board.

Andrew Whittaker: It is as independent as we can make it within the statutory framework.

Q 116

George Mudie: I heard what was said earlier. You appoint the board, you do the budget, you collect the bodys moneyyou charge it for collecting its moneyyou appoint the staff and you appoint someone to go in and review it, in terms of value for money. Do you think that anyone objectively reviewing that body could say that it is independent of the FSA?

Andrew Whittaker: Yes, I do. Those are accountability controls for which we are responsible. One point I would pick you up on is that we do not appoint the staff of the new bodyor will not do so when it is in place.

George Mudie: Sorry.

Andrew Whittaker: We will not be appointing the staff of a new body. The staff of the new body will be appointed by the members of its board. We shall appoint the members of its board, but they will then independently select who they want to have as the staff of the body.

George Mudie: So, the board will appoint the staffall the staff.

Andrew Whittaker: Yes. The existing staff who work on financial education issues in the FSA will be transferred.

George Mudie: But the rest is okay.

Andrew Whittaker: The rest will be appointed by the board.

George Mudie: I mean, the rest of the things that I have said are as written in the Bill.

Andrew Whittaker: The rest of the points that you made are indeed my understanding of what is in the Bill. Where I part company from you is in the conclusion that the body is not independent. It is able to operate independently in what it does.

Q 117

George Mudie: How many years has the FSA been carrying out this role?

Andrew Whittaker: Since 2001.

Q 118

George Mudie: So that is eight years. You reckon it will be about 15 years before you can decide whether you are improving. What would you say after eight years?

Andrew Whittaker: I would just go back a little bit to clarify what I said. We have an objective relating to financial awareness in legislation that has been in force since 2001. There was a major project set up, which was broader than financial awareness and went into issues of financial education. That was set up within the last few years, but the baseline from which it will work was set in March 2006, rather than back in 2001. So the assessment of what progress is being made will be effectively an assessment from 2006. Going back to what difference have we made, I personally am not best placed to give you details of what we have done, but I would be happy to write to you on that.

George Mudie: Thank you.

Q 119

Charles Walker: If it was your choice, you would not call the body the Council for Financial Stability, would you? You have just told us that you cannot ensure financial stability. So why is it called the Council for Financial Stability? I am still struggling to see what you actually do, or hope to do.

John Footman: That the council does?

Q 120

Charles Walker: Yes.

John Footman: It doesor, I think, is intended to dosimply what it says on the Bill, which is to co-ordinate between authorities that have separate, but slightly interlocking, powers. That is a normal thing for a co-ordinating body to do.

Q 121

Charles Walker: But it is called the Council for Financial Stability, is it not? You have said in your evidence that you cannot ensure financial stability, so why are we wasting energy on calling it the Council for Financial Stability? It sounds almost Soviet: The Council for Financial Stability and Building Tractors. Why are we giving it this title when clearly that is not its purpose?

Andrew Whittaker: I do not have any particular views as to its name. I am happy for it to be called the Council for Financial Stability or any other suitable name. In indicating that financial stability is very difficult to achieve, I was not intending to indicate that it was not extremely important to do all that you can to achieve it. You may draw comparisons with climate change. Climate change may be a huge issue, but that does not mean that you should not do what you can to prevent it. I think that, in current circumstances, it is highly important to do all we can to achieve financial stability, even though there may be risks that we face that are very tricky to handle.

Q 122

Charles Walker: But in practical terms, what are you going to do to try to ensure financial stability? Clearly, you need to be able to understand and identify the risk inherent in the financial instruments with which banks are trading. That is what caused the current financial crisis. It is no good saying, Well, when we have another Northern Rock well do things differently, because Northern Rock was the fever that presaged the plague. By the time Northern Rock had gone, it was too latethe chain reaction had started. What are you going to do differently to ensure that we do not have financial institutions taking on huge amounts of risk that you do not, or did not, understand, and that they clearly did not understand?

Andrew Whittaker: To answer that, it is important to start with the causes of the financial crisis. The causes of the financial crisisextensively and, in my view, very convincingly set out in the Turner reportare not simply about individual misconduct or mismanagement in particular institutions. They are also about huge economic forces, and particularly financial imbalances between the west and China. Those have caused China, as a nation of savers, and the US, in particular, as a nation of borrowers, to create financial dynamics that eventually proved to be highly destructive. That is, if I may say so, an important illustration of why it is important that financial regulation does not just look at micro-prudential issues and individual issues within firms, but also looks at the wider economic environment, taking into account the kind of contribution that the Bank of England must make.
I would be very happy to accept also that there is a very significant role for regulation, but, in the past, as we have said in relation specifically to Northern Rock, regulation was not done as effectively as it could have been. A huge amount of work has been done since the internal audit report we published on our supervision of Northern Rock, in order to strengthen the way in which supervision is conducted. We have taken on more than 100 additional supervisors over the past year or so. We have reorganised supervision and have put in place major training arrangements. We have started to interview, for the first time, senior people who are being appointed to the boards of institutions, and we have done a huge amount of work on governance. We have started being more intensive and intrusive in our approach to supervision, by starting to challenge business models, and by looking at where the money is coming from within individual firms and what their exposures are. I am conscious that I have answered very comprehensively, but I want to emphasise that we accept that supervision was not done effectively, and that we are doing a lot to improve it.

Q 123

Charles Walker: To be fair, many economists were saying that there was an enormous trade imbalance between China and America, and that there probably were no acts of misconduct. We must not allow ourselves to think that these bankers were doing anything illegal. They were creating hugely complex, highly leveraged financial instruments, and failed to price risk. They did not understand what was being traded, and neither did the FSA. Surely, in future we need to understand how risk is being priced within major financial institutions. It is not a question of misconduct. If there is misconduct, you lock people up, of course; that is a failure of a firms compliance department. But the issue is all about not understanding where risk lies within financial institutions and the economy. How are you going to ensure that banks explain to you exactly what they are doing?

Andrew Whittaker: Just to pick up on that last point, I think it is both about getting banks to explain the way their business models work and the vulnerability of those models, and also, at the highest level, about looking at risks in the wider environment. In the FSAin the Bank as wellwe have assessments of risks, and the one that we have discussed today is only one. Any of those risks could be hugely problematic if it were to emerge. The key thing, as you rightly say, is to be able to understand the risks and to translate that understanding of a risk into an understanding of how that risk might emerge in an individual institution, and then to try to take action to prevent it from doing so.

Q 124

Colin Breed: Going back to the new intrusive and inquisitive role, will that include on-site inspections by teams going into banks head offices and branches, both in this country and abroad?

Andrew Whittaker: Potentially, yes. That primarily tends to be done not through a bank examiner model of the kind that has been used in the USoften with a resident supervisor in an individual banking institutionbut by a focus on analysis, with the senior management, of the issues in the organisation.

Q 125

Colin Breed: So you are not going to have individual supervisors within large branches, and you are not going to rely only on a tick-box, desk-top assessment, but you are going to include on-site inspections by teams as and when required. Will you have the resources to do that?

Andrew Whittaker: That is a fair question. As with everyone else, inevitably our body has to be choosy about how it uses its resources. The choice we have made at the moment is that we should focus on the institutions that have the highest potential impact, so we are looking particularly at the largest banks and insurers. I think that members of the Committee would agree that it is sensible in any environment of risk or constraint to try to focus resource where the risk seems to be largest. No jurisdiction could sensibly invest the money that would be needed to have a regulator at the shoulder of everyone doing every transaction. What is needed is a smarter approach, in which you try to look at the strategic issues and the business model and its vulnerabilities. When you identify those, you should be ready to be firm in indicating the problems that you see and in trying to stop them.

Q 126

Colin Breed: Are we, by implication, going to allow regulators from home countries to come into the UK, as the host country of their banks, to undertake regulatory and supervisory visits?

Andrew Whittaker: By all means.

Q 127

Colin Breed: Mr. Thomas, do you think that in the Bill, it might have been a good idea to bring together the current credit control, or consumer credit, aspects of the OFT into something more co-ordinated? We could leave everything with the FSA and the financial ombudsman, so that we did not have this split of responsibilities between the FSA and the OFT when it came to consumer issues.

David Thomas: We have a close working relationship with both the FSA and the OFT, and that issue has not caused us any practical problem at all in dealing with cases in both those areas, or with bodies that are regulated in both those areas. However, the recent Supreme Court judgment talked about looking at the pricing of a current accountwhether it was in credit, in debit, or varied between the twoas a single package. That obviously raises some interesting questions about the future shape of regulation, but those are matters of policy, which I do not think are for an ombudsman to comment on.

Q 128

Colin Breed: Do you think that the average consumer understands why the OFT operates one part of the banking package and the FSA is responsible for another part of it?

David Thomas: Our awareness research shows that actually only a minority of consumers are aware of the existence of the FSA or the OFT, let alone what they respectively do. There is clearly a great deal ofI am trying to avoid the word ignorance, but you know what I mean; there is a great deal of it out there among consumers about how things are regulated. They just have confidence that there is a regulator, without knowing who it is or why it is.

Q 129

Colin Breed: They sometimes have more confidence before they get the answer about the regulatorslet us put it that way.
Mr. Kuczynski, on the compensation side, do you think that the amounts of compensation that banks and financial institutions may pay out should be a charge against the bonus pot?

Alex Kuczynski: I am not sure that that is a matter for the Financial Services Compensation Scheme.

Q 130

Colin Breed: I just asked for your opinion.

Alex Kuczynski: I do not think that, on behalf of the FSCS, I can give a view on that question.

Q 131

Colin Breed: You do not have a view.

Alex Kuczynski: Not on behalf of the FSCS.

Q 132

Mark Todd: Some of us sat through the Banking Bill, which gave the Bank a financial stability responsibility and led to the establishment of the Banks own financial stability committee. Does this Bill have any operational implications on that body and how it works?

John Footman: No, I do not think so. Obviously, the financial stability committee reviews the analytical material that comes out of the financial stability area of the Bank, which itself is to be reviewed by the Council for Financial Stability. So the FSC will be conscious of the interest of the co-ordinating body, but operationally, no, the Bill does not have any implications, because the FSC monitors the Banks use of its resolution and payment systems oversight powers, it looks at the Banks regulation of Scottish and Northern Irish note issues, and it recommends the Banks financial stability strategy, within the powers that it has. I do not think that anything in this Bill affects that directly.

Q 133

Mark Todd: Turning back to the education responsibility, a pilot has been run on providing generic financial information to consumers. The publicity indicates that the new body will have the task of rolling out such a service. Has a proper analysis been made of what the pathfinder pilot has achieved?

Andrew Whittaker: At the risk of disappointing you, perhaps I could include that in the material that I am writing for you in any event.

Mark Todd: OkayI will be disappointed.

Q 134

Mark Hoban: May I ask Mr. Whittaker a couple of questions about some of the powers that the FSA is getting under the Bill, and the new regulations to prohibit or require disclosure of short selling? You had what some would argue was quite a restrictive regime in place early in the financial crisis. What was wrong with the legal basis of those powers that requires a different set of powers now?

Andrew Whittaker: Thank you for asking that question. As you will know, the powers that we used last autumn required us to characterise short selling as market abuse. Those powers are currently subject to a sunset clause and are potentially going to be affected by a European directive. The Bill enables us to ban short selling without having to categorise it as market abuse. It therefore enables it to be done without being impacted by any changes in Europe.

Q 135

Mark Hoban: It was not clear from the wording of the clause whether it was seeking powers to prohibit short selling in specific instances or by specific institutions.

Andrew Whittaker: I think that it will be in specific institutions. I do not envisage it being exercised against an individual or a short seller.

Q 136

Mark Hoban: The other area, which we have managed to avoid commenting on so far today, is remuneration. Will you explain the powers to do with seeking to take over employment contracts?

Andrew Whittaker: Yes. I should start by saying that we are happy with the powers proposed in the legislation. We have an existing code of conduct in relation to remuneration. It focuses on methods of remuneration, to ensure that those that are used are not ones that promote risk. The new legislation would provide an additional backing to that kind of codespecifically, if it were incorporated in the form of rulesthat would enable provisions that we had bound by rules then to be ineffective. It would not be a retrospective effect. It would apply after the date on which the rules come in to contracts that are made after that date. We do not see any virtue in retrospection. Indeed, we see a positive virtue in provisions encouraging people to formulate their contracts in a way that complies with the codethat complies with the rules.

Q 137

Mark Hoban: To be clear about it, if someone had an existing employment contract that was in breach of your code, you would not seek powers to tear up that contract, or does it relate only to future contracts?

Andrew Whittaker: Yes. In that situation, it is conceivable that there would be other action that we would want to take. We might, for example, be concerned about the exposures that would result to the firm from that contract of employment. Therefore, we might ask for additional supervision of a trader who was incentivised in a way that we believed was dangerous, but the effect of this clause would not be to make that an unlawful term.

Q 138

Mark Hoban: I want to pick up Mr. Footman on the concerns that he touched on in response to Mr. Tyries questioning. You referred to the concerns that a bank has about the resolution and recovery plans set out in the Bill. Would you elaborate on those a little?

John Footman: Yes. This is a point that I referred to in the short paragraph that I sent to the Committee earlier. Developing living wills, as they are colloquially called, is one of the priorities for both the regulators and for the resolution authorities, and in this case we are the resolution authority. Recovery plans are for banks that have got into difficulties but are being helped, managed or overseen out of it by the regulator. Resolution plans are for the resolution authority, which will need to have a very strong base of information at very short notice that tells it about the possibilities that exist for resolving a banks affairs; the constraints that may exist as a result of the banks structures, domestically and abroad; the kind of loan books that it has; the sort of risks that it is running; and particularly the way in which its balance sheet is structured. That is a mass of information that the resolution authority needs.
Our slight discomfort with the Bill is because the process of collecting all the information is entirely with the FSA. With the best will in the world, operating through someone else to get something that you need is less efficient than trying to do it directly. For that reason, at various points we have asked for the bank to have a direct power to get information from the financial institutions, consistent with the statutory powers that it has. More widely, you can see that in the Bank of England Act 1998 we have a power to get monetary statistics from the banks. The FSA obviously has powers to get information from the banks. In the Banking Act 2009, under the payment system oversight, we have a power to get information from payment system operators. We have another power to get information from the Scottish and Northern Irish banks in relation to our regulation of their activities.
On the special resolution authority role, we do not have an information power, and we would like to have one directly. We would find it more productive and helpful to do so. That is not to say that we cannot work with the FSA. At the moment, we are working with the FSA across a small number of firms on resolution plan piloting, which is starting now and running into the first quarter of next year. That is happening, but our preferencewe have expressed this to the Treasury and I think people here know about itwould be to have a direct power to get information from banks, or to have an ability to insist that the FSA get it for us rather than have to ask for it. Obviously, the FSA has its own constraints on asking for information from banksAndrew can explain thisbecause there are regulatory codes that it has to comply with when it asks for information, and the fact that the Bank of England wants it is not always a compelling reason for getting it. If we had the power, the fact that the Bank of England wanted it would be an overwhelming reason for getting it, and that is the concern that lies at the background of what I say.

Q 139

Mark Hoban: Why have you not been given this power?

John Footman: Because the FSA has argued that it is the single regulator and there needs to be just one interface with the banks. If there were more than one interface, it would cut across the FSA. Andrew, you can put that better than I can.

Andrew Whittaker: John has put our concern very well. The process of ensuring that a bank is stable and able to be rescued and recovered is part and parcel of what a regulator needs to do, so we think that it would be a confusion of responsibilities and accountabilities if the bank were to have a direct power that enabled it to start going into that. However, just to provide some reassurance on the second concern that John raised, I believe that the fact that the Bank wanted information about a living will would be a perfectly good and sufficient reason for us to obtain that information. The Bank is the clear stakeholder on the preparation of a resolution plan because it is the resolution authority.

Joe Benton: Thank you. That brings us to the close of this session. On behalf of the Committee, I would like to thank you for your attendance today and for the manner in which you have answered the questions. Thank you very much.

Joe Benton: We will now take evidence from Which?, Age Concern, Citizens Advice and the Financial Services Consumer Panel. May I welcome our four witnesses? Would you mind introducing yourselves briefly?

Peter Vicary-Smith: I am Peter Vicary-Smith, chief executive of Which?.

Jane Vass: I am Jane Vass, financial services policy advisor at the newly merged charities Age Concern and Helped the Aged.

Adam Phillips: I am Adam Philips, chairman of the Financial Services Consumer Panel.

Peter Tutton: I am Peter Tutton, social policy officer at Citizens Advice.

Joe Benton: Thank you very much. We will begin with Mark Hoban.

Q 140

Mark Hoban: May I ask you all about the new collective proceedings powers set out in the Bill? Is the fact that we are relying on consumers to act collectively to enforce rightsif they have themin financial services, which is the one of the most heavily regulated sectors in the UK economy, a sign that regulation has failed? I just get a sense that someone is not doing their job properly, and is relying on the courts and on consumers to do the job on their behalf. Is it a sign of regulatory failure?

Peter Vicary-Smith: It is certainly the case that the regulator is not doing its job, as we can see from the evidence on payment protection insurance and the persistent mis-selling and lack of action. It created a situation where the Financial Ombudsman Service was overwhelmed by claims, of which some 89 per cent., I think, have been upheld. It is undoubtedly the case that there are problems.
The FSA is trying to tackle the issue, but the regulatory process takes too long to address a number of such problems, which is why we are supportive of the measures on collective redress. It would enable consumers to get their entitlement to funds. After all, to be in the process, a firm has to have broken the law, and action needs to be taken to address that. The case has already been proven against it, and the question now is whether it is going to be relieved of its ill-gotten gains, and either return the money to consumers directly, or return it in some other way that ensures distribution under consumer protection measures.

Jane Vass: I think that there have been failures in the past, but we see it as a package of redress measures, which, taken together, are extremely important. We particularly welcome the proposal for collective proceedings with an opt-out procedure, which will redress a great imbalance for older people, who often are not in a position to make a complaint themselves if they are socially isolated, if they do not have support, if they are immobile, or if they just do not have access to the available forms of information. We therefore strongly support those aspects of the Bill.

Adam Phillips: I think that the strengthening of section 404 of the Financial Services and Markets Act 2000, which is proposed in the Bill, will make it somewhat easier for the FSA to intervene. I would hope that the availability of this option would encourage them to do just that. As Peter says, however, the ability for an organisation or individual to take collective action or set up a collective action in respect of payment protection insurance, for example, which seems to be drifting on, would be a useful power to make available to consumers.

Q 141

Mark Hoban: Adam, you are chairman of the Financial Services Consumer Panel, and the Financial Services Bill seems to cover a wide range of topics. Is there something else that should be in the Bill to keep the FSA up to the mark so that we do not have to get consumers to take financial services providers to court?

Adam Phillips: I think that the FSA has changed its behaviour in the last year. There has been a restructuring and a couple of people who have more of a consumerist background have joined the board: that can only be encouraging. The FSA is clearly more willing to take enforcement action. The real issue here is to ensure that the leadership in the FSA takes its consumer protection objectives seriously and that it has the tools to do the job. In some cases, we see in this Bill proposed changes that will give it more certainty against legal challenge.

Q 142

Mark Hoban: Peter, I understand that Citizens Advice is quite content to have either the opt-in or opt-out process, whereas Which? would rather have an opt-out process. Why are you agnostic on that?

Peter Tutton: I think we would like an opt-out. The way in which the legislation is drafted gives the courts the power to decide. In most cases, we would prefer opt-out, so we do not have to marshal and herd potential claimants in. But it seemed to us that the legislation had taken that into account, so it was not such a hot point for us.

Peter Vicary-Smith: One of the reasons for our much preferring opt-out is that, after all, we are one of the few bodies, and perhaps the only body, that has actually taken action under this, with JJB Sports. Our experience of that process has affected our views on the best mechanism. We found that, despite quite a lot of media attention, it is difficult trying to get people, when you are at the end of the process of regulatory enforcement, to remember that they bought a football shirt several years ago, that they had a receipt showing they paid for it at the time, and to be bothered to do anything about it.
That means that it is incredibly difficult, if it is opt-in, to get people involved. We ended up with fewer than 1,000 people claiming, out of the many hundreds of thousands who had been mis-sold in that instance. So we think that the danger is that, if you do not have opt-out, you will just have continued weak take-up, and it will not be a deterrent to firms from taking this action. After all, it is about ensuring that firms are discouraged from illegal activity because they know that they will not get away with itand if they do not get away with it, they will have to reimburse or pay into some other fund. So the deterrent is really important. Opt-in does not offer that deterrent.

Q 143

Mark Todd: May I turn to the financial education body that is being set up? Someincluding mehave criticised the current activity of the FSA as being simply about shipping shedloads of material into various places, but without measuring in any way the effectiveness of the various actions that it is taking. Do you share that view?

Adam Phillips: I think that the FSA has done a good job of piloting a financial education and capability process; there was nothing before it started doing it. I agree that it has tended to over-claim its successes, but the individual pilots have been quite successful in terms of the behaviour changes they have observed. The panel is enthusiastic about this development. We think this is a good development that will provide a useful way of getting consumers to engage with the industry and to encourage them to save and to take out protection that they might otherwise not be doing. We see falling take-up of things such as protection at the moment.
We believe that for it to be effective it now has to be separated from the regulator. There is a potential conflict of interest between the regulators role in terms of working with the industry to make it effective in the way it delivers consumer protection but also protects the system, and an education body that has to represent the consumer and go potentially beyond what is within the proposed Act. As an example, I would like to see consumer education bodies writing documents that say things like, A good bank will reply to a complaint within two weeks, but within the law it has to do it within eight weeks. The FSA would say that eight weeks meets the requirement and anything more is unnecessary.

Q 144

Mark Todd: When you say that the panel welcomes this new body, would not one of the critical determinants be the degree of independence it actually had? I do not know whether you were present for the discussion about the model of how the FSA related to this new body. Are you satisfied that it would be genuinely independent in its functions?

Adam Phillips: I was not present for the discussion. We are concerned about the wording, which requires the body to pay regard to maintaining confidence in the financial system and maintaining stability, which potentially could be used to restrict what it is able to do. We think that if it is to be effective and trusted by consumers it must be able to confront the industry and confront bad behaviour.

Q 145

Mark Todd: Which may indeed involve making quite robust statements about the quality of various services, which could in theory have some bearing on that broader financial stability. What about the Governments model of the people who are on this new body being appointed by the FSA? It is not very clear who they might be or from what pool they might be drawn. I attempted to get the FSA to say a little bit more about whom they might be looking for to occupy these roles and got about as dead a bat as could be manufactured. Is there more that you could say about the kind of people that one ought to have on a body of this kind genuinely to guarantee its independence?

Adam Phillips: There are two things to say. First, the board of the Financial Ombudsman Service is appointed by the FSA and it has exhibited considerable independence. I think it is a matter of the people you have rather than necessarily the appointment process. There are undoubtedly some very good people with consumer experience around. One would like to see the leadership coming from that sort of person. One of the issues for the FSAs board is that it has been dominated by people who work within the financial services industry.

Q 146

Mark Todd: Yes, but there is another part of this, which is the word education. The material I have observed from the FSA delivered direct or through personal finance education on its behalf in the education field does not stand the test of mass pedagogic engagement. In other words, just getting people to use them as educational tools is way beyond them. They are materials best suited to reasonably well set up, well established and highly motivated people rather than for bulk activity. Would it not be useful to have people who have some genuine experience of delivering this as a service, perhaps to the unwilling, certainly the ignorant, rather than some idealised consumer?

Peter Tutton: The Citizens Advice service has built up a lot of experience of doing exactly that, of using materials produced by the FSA and others and delivering them to people who need them. Our strategy for financial education is based on lower-income adults in households where we often find people who are subject to bad practice and being ripped off by financial services, and who need a lot of help to understand financial products and services and even basic skills such as budgeting. For example, we have a strategy of 14 regional financial capability forums, which bring together about 700 different organisations, so we are acting as a conduit between those materials and front-line workers in places such as housing offices and various different organisations. The strategy is not just about providing materials, but about how you provide an interface on the ground with people as consumers, as well as with people who consumers go to for help and advice. We reckon that we have managed to reach about 200,000 people a year by doing that.
You are absolutely right that to concentrate on education is the wrong thing. I think that we need to ensure that a new body has a strategic view and is able to build on what we already have. We hope that that will provide a step change in the kind of servicesadvice, not just information, serviceson things that can help people understand it, and advice and information services where people can be talked and helped through decision making.

Q 147

Mark Todd: May I give a concrete example? The FSA distributes a great tome on financial products to expectant mothers and seeks to educate them on that. I cannot believe that such a tome is of huge value to most people who receive it, other than as a way of propping open a door. From your positive remarks, you presumably hold such products in higher esteem than I do.

Peter Tutton: I think that the point here is that what is important with a new mother is whether they are getting the benefits they are entitled to and whether there are other needs for financial products and so on. We try to provide a holistic service. Producing good materials can help; they can be a tool for our advisers to work through with someoneit saves us having to print themabout all the things they need to think about and the things they might be able to do to help us. I think that you are right: all printed materials need to be proofed to make sure that they work, are understandable and so on. But the key thing is how they work with advice services for those who need help to interpret them, in which case they can be useful.

Q 148

Mark Todd: Finally, if you look at the FSA reporting of that particular area of activity, you will see that it shows huge numbers of various achievements, as in, We have reached x number. On Second Reading, I quoted an example in which there was a figure of the number of children who had been reached by FSA materials of some kind or another, which appeared simply to multiply the number of pupils by the number of schools on its list. Does there not have to be a sharper or more rigorous engagement with the qualitative impact of what these bits of paper and often expensive teaching materials are actually achieving?

Adam Phillips: I absolutely agree. That was the point that I made at the beginning. I think that the FSA has been overclaiming what it has been doing, which does it no favours. But if one takes a more focused view of the individual pilots, I think it has come out quite well. The issue now is to ensure that if money is being put into it

Q 149

Mark Todd: Just to nail that down, the FSA representative was going to write to us about what the large pathfinder pilot on generic advice had been shown to have achieved, but you may be able to tell us that yourselves.

Jane Vass: I happen to have met with money guides from Age Concern in the north-east and north-west of England today. The numbers that we have reached so far have been much smaller and in the thousands. But looking at the impact, as opposed to reach, on individuals, the sorts of face-to-face advice service that they have been able to offer has been extremely encouraging. Not only are people coming in when a threatening life event happens, but there are also indications that people are now starting to be reached in a proactive way. For example, older people who would not have previously thought about it are now starting to be encouraged to look at the financial products on offer, perhaps notice that all those products are with one provider, and are given the confidence and knowledge to shop around. That is the absolutely essential service that I think the new financial education body will need to offer.

Peter Vicary-Smith: May I just say on the governance point that your point on the diversity of perspectives and interests that are brought to the table is very well made? That is why we think it is very important that it has a lay chair and a majority of independent members. This is a great public service and it is not something that should be captured either by the industry, by the regulator or by consumer groups. It needs to have all these representatives brought to the table so that we can get a true understanding and interaction, not just let it become a tool of any one constituency.

Q 150

Colin Breed: May we turn to the provisions of clause 27, which is all about these credit card cheques and such? It seems quite sensible because there has been some problem. Is it or was it a serious problem? If so, is it now being properly addressed with the provisions that are contained in the clause?

Peter Tutton: I think credit card cheques are a problem. You need to locate them generally in the whole question of credit cards and their relationship to debt. We deal with about 1.9 million debt problems a year. Credit cards have for a long time been the single biggest problem area of debt that we deal with. There are about 300,000 to 350,000 different credit card debts every year. We see cases of people with really bad multiple debt problems£100,000 spread over 20 products. Credit cards are always a big part of that multiple credit card use. So there is a pattern.

Q 151

Colin Breed: Was that including cheques?

Peter Tutton: I am coming to cheques. Credit card cheques are part of a pattern of credit card practices which are unhelpful and harmful in some cases to consumers. The specific things about credit card cheques are that there is some evidence from research to suggest that they are linked to over-indebtedness. They tend to be larger transactions. We have seen some cases where people in financial difficulty have resorted to using credit card cheques to help them try to make ends meet, which has made their debt problem worse. They tend to be more expensive. They are often charged as cash transactions with other levies. They do not contain the same sort of protection as section 75 protection. The other big issue is the unsolicited issue. So these measures are not trying to ban credit card cheques per se. What we and other consumer groups have called for is an end to their unsolicited issue. If consumers find them useful, they can ask for them. The problem is when they are sent to consumers and they have a damaging effect. That should stop.

Q 152

Colin Breed: So it was a serious problem and you are happy that the provisions in clause 27 will go as far as you would wish?

Peter Tutton: We have called for the ending of the unsolicited issue.

Q 153

Colin Breed: You would not suggest banning them altogether?

Peter Tutton: I do not think we can make that case. If consumers have properly explained to them what they are and they want them, we can leave it at that.

Peter Vicary-Smith: I would agree entirely with that. Let us not pretend that there is great consumer demand. In 2008, 292 million were sent out and only 0.9 per cent. were then used. Most of us are sent these cheques and then there is the fraud risk and all the rest of it. They are a product in search of a market. They are only one part of the problem of irresponsible lending. We welcome that move. We were very disappointed that there has not been a move on unsolicited credit limit increases, for example. Although at a public event last summer the Prime Minister committed to banning unsolicited credit card cheques and unsolicited credit card increases, that has not come through. We think that is a similar serious problem, because in my own experience and the experience of everyone I talk to, these limit increases are not used primarily as a way of getting people used to credit and extending it through. They are given to you when you are in debt. They are not given to you until you are near your credit limit and then they are given to tempt people into further debt. We would like to see those go on an unsolicited basis as well. One of the things we are calling for in the passage of this Bill is to ask each of the Front Benches to make it clear that they will take action against unsolicited credit increases as well. At the moment the industry has no incentive to come to the table. If all parties indicate that they will deal with this problem, the industry will have to come to the table and tackle it itself.

Q 154

Colin Breed: Let me get this right. You would quite like a provision within the Bill which not only banned the unsolicited issue of credit card cheques, but unsolicited increases in credit card limits?

Peter Vicary-Smith: Either in the Bill itself or for each Front Bench to indicate that they would take action subsequent to the election. Then the industry will probably move in that direction voluntarily.

Q 155

Colin Breed: I have failed singularly with all the other witnesses today, so you are my last hope. Do you think that there should be some provision within the Bill to do away with the anomaly of the Office of Fair Trading looking after some aspects of consumer credit, such as consumers concerns with their bank and so on, and the FSA looking after other bits? Would it not make some sense to take away from the OFT the bit that it looks after and give it all to the FSA, so that it is all with the FSA and everybody can be happy that that regulator looks after everything?

Peter Vicary-Smith: You might get slightly different flavours on performance, but

Colin Breed: Might I get half a vote here?

Peter Vicary-Smith: I will give you our very clear view. I am agnostic about where it lies, but I would like credit regulation to lie in one place. Where the best place is I am relatively agnostic about.

Q 156

Colin Breed: But it would be sensible for it to be in one place.

Adam Phillips: Indeed, and the consumer panel would support the view that the best place to put it would be with the FSA as far as the firms are concerned with which they have an ongoing supervisory relationship, which is essentially the large banks. The reason for doing that is that they are in there supervising them already. They have conduct risk supervisors looking at deposit taking and savings and investments. It makes complete sense to have them look at the issuance of credit. They could stop a lot of those practices if they had the necessary powers to do it.

Q 157

Colin Breed: So is it a bit disappointing that that is not tackled in the Bill?

Adam Phillips: It is disappointing. We would like to see it tackled. We would also like to see the FSA being asked within section 3 of the Financial Services and Markets Act 2000 to pay due regard to value for money, which we think would enable it to deal with some of those particular issues and the extraction of profit that has gone on with products such as payment protection insurance, which encourages mis-sales.

Peter Tutton: We deal with an awful lot of consumer credit problems. It is not so easy. Moving it all into one place is not a simple question of picking up credit from the OFT and plopping it into the FSMA. They are very different regimes. Both of them have their strong points and their weaknesses. If you did that, consumers would lose some powerful protections under the Consumer Credit Act 1974.
If that comes to pass and there seems to be a growing consensus on putting everything in one place, we would say, again, that we are quite agnostic as to where it goes. We would say that the OFT has a lot of experience in consumer credit, the relationship to trading standards and the long tail of credit that you would have to think about. Aside from that, I would not discount its expertise and its growing use of its powers under the Consumer Credit Act 2006 to bring to book some bad traders who have caused consumer detriment. As well, you need to think about that rather than just moving it in the Bill. We would not want to lose some of the provisions such as the unfair credit relationships test, the time orders and things such as the early settlement discount.

Q 158

Colin Breed: But the FSA must treat customers fairly, so it is already into fairness.

Peter Tutton: They have a sort of overriding fairness duty. As I understand it, they have a principle; principle 6, I believe. But a principle does not create a right of private action in the same way as the unfair credit relationships test under the Consumer Credit Acts, so you would not be able to use it, say, as a defence if you were taken to court by a creditor. You would not be able to mobilise it in quite the same way. It is a regulatory principle rather than a necessary consumer redress principle. You could argue that the FOS can take it up with its own fairness things, but there are cases where precedents have been set about how whole practices or contracts work that may not be

Q 159

Colin Breed: But it is not a completely impossible legislative hurdle.

Peter Tutton: No, it just needs

Colin Breed: It just has to be pointed out that you have to ensure that you do not lose anything in bringing it together.

Peter Tutton: Yes, that is the point.

Q 160

Lindsay Roy: I want to return to financial education. I agree wholeheartedly with Mark: the acid test is about, So what? Product, yes, quantitative measures, yes, but surely it is about process and qualitative measures. Improving financial education is not only laudable, it is an imperative, but there are no magic bullets or quick fixes. Are you aware of any notional or national targets, or any benchmarks for improvement over a time scale? Would you not agree that it is vital that we know how we might measure success and, en route, how we might monitor progress towards that success?

Adam Phillips: As far as I am aware, targets and benchmarks have not been set. The FSA is on record as saying that it proposes to repeat its financial capabilities study, but that it does not expect to produce a significant change quickly. That suggests that they reasonably do not expect to see much next time around. If you look at the sort of changes that we would like to see, there are really two components. The first component concerns what is happening to defined benefit pension schemes and with the rather alarming drop off in protectionlife insurance and other kinds of insurance. A very quick fix has to be put in place to encourage people to start saving more and to protect themselves better. The longer term is definitely educational and is about producing a generational shift in how people behave. Both of those things have to be done, but we should set the new education body some aggressive targets to change behaviour. If that body does not achieve those targets, we will have to look and see why.

Jane Vass: May I pick one particular area in whichif one takes Adams approach to be the sensible oneyou could actually measure progress? It would be to look at annuities and how people shop around for them on retirement, which I understand from Age Concerns money guides today, is actually proving to be quite an issue for people with low incomes, who are drawing small pension funds on retirement. That is an area where it is possible to track the numbers shopping around and buying elsewhere. Of course, it is difficult to tell what the right answer is. Some people who shopped around might have been better off staying with their existing provider. However, if one looks at market activity in that sort of way, and also in regard to consumer education and guidancethere is a spectrum of need thereyou can start to create a virtuous circle. It is not just about explaining the industry to consumers, but consumers, through this mechanismthrough the education bodyfeeding back to the industry about broader issues. The education body would not see them as the voice of the consumer, but we think that they should have a specific ability, in the Bill, to be able to make public statements.

Peter Tutton: The other thing is that we are not necessarily starting from scratch. I said earlier that the CAB service has been doing various bits of financial education work for quite a long time and we have those pieces of work evaluatedwe get external valuation. For instance, we were involved in the OFT Save Xmas campaign and that was evaluated. Nearly 40 per cent. of the people participating had positive changes in their savings decisions. Various other projects have gone back some time after they have had some education done to them, as it wereparticipating in a projectand asked people how that has changed how they made decisions about savings and financial products, and you can show some improvements.
A lot of the work that we do at the moment is funded by the private sector. To get that money, we need to be able to demonstrate outcomes; we need to demonstrate exactly what you are arguingthat there is an effect. The new body should look at how people have evaluated things, the idea of having a strategic vision of what it is trying to achieve, but that being based on some of the things that already exist. There is evaluation work going on. We have a number of projects that have had, or have, ongoing evaluation. A lot of the work going on on the ground will now have that evaluation. That is something that the body needs to take on.

Q 161

Lindsay Roy: And the evaluation is informing new proposed development.

Peter Tutton: Yes, there is feedback.

Adam Phillips: I would just like to add to that. The FSA has, as we have heard, involved a number of bodies already delivering advice to consumers. If that is going to be effective, it should act as the lead body for all sorts of advice, so that there is some co-ordination and they work together. I am thinking particularly about pensions. For this body not to be able to give advice on pensions would be a considerable failure, because most people see that one of the key things to save for is their pension, so it should be a one-stop shop.

Peter Vicary-Smith: Helping people to understand what they are buying has two dimensions. One is about educating people, so that they know what they are getting, and shopping around and all the rest of it. The other end of the funnel is about simplifying the products and making them more transparent. I am always reminded of the fact that in the days when we had VCRs, none of us could ever programme the VCR. That was not solved by teaching us how to programme VCRsit was solved by the industry developing products that did not need to be programmed. It strikes me that there is much more that needs to be done by the industry to simplify its products and to identify real competitive edges, rather than identifying a number of features that differentiate products but are not truly different, and competitive benefits. The industry needs products that consumers with a comparatively low degree of further education can understand. If we are asking people to understand the products that are widely sold out there when we are into many years and generations of education, more can be done from the other end by the industry.

Q 162

John Howell: May I pursue that point? I asked the FSA what success looks like for the consumer financial education body, and I received a rather woolly answer; there was nothing precise there. I want to put essentially the same question to you. The problem that I have, of course, is that it is very easy to try to measure that success in targets that lead to output-generated measures. What we are trying to achieve is outcome-generated measures and outcome changes. Can you try to put that in a broader context to show how you will get that agreement between you, as a focus and a pressure on the new education body so that it achieves real outcomes?

Peter Tutton: I am trying to think about this. I think that there are three levels to helping and supporting consumers with financial services. The first is what you could call financial capability, where your outcomes would be to ensure that all consumers have at least a basic working understanding of the basic financial terms. We see people who do not understand what an interest rate means and or that it is good in savings and bad in credit and so on. We get people coming into citizens advice bureaux saying, Ive got this loan agreement, but what does it mean? Or they might say, It is a secured loan, but they do not really know what a secured loan is. We get people who have been sold things like PPIpayment protection insuranceand they do not even realise that they have been sold PPI, or what it does, and so on.
So there are some outcomes there that you can look at. You can look at people who have participated in things and ask how their perceptions have changed, or you can do survey monitoring, and so on. You do that to look at basic levels of understanding about financial skills and financial knowledge. In addition, we may start to see in the longer term that our levels of debt inquiry go down, because people are more aware of the risks of debt and perhaps more able to budget, and things like thatsome very big-wheel things.
Secondly, financial education provides what is called generic financial advice; getting consumers ready to market. Do consumers have a better idea? For instance, in credit, which is an area that I work with a lot, do people understand the features of the credit card and what is unique about that product as opposed to other products? Do they understand what they would use that product for, as opposed to what they would use a different type of product for? You can look at and measure how peoples understanding of those types of questions changes.
The final part is where things go wrong. Can we get people to understand that, if things go wrong, they should come for advice earlier and get their problems sorted more quickly? We can measure that as well. Very few people come for advice about debt before they are actually in crisis; people come when they are in crisis. If they had a better understanding, we could get them in earlier and it would be less expensive and harmful for them. We can measure that too.
So you can see that kind of progression of different levels of intervention. You can look at each of those levels to see how peoples perceptions have changed as a result of an intervention. That is a bit woolly, but I hope that it is not as woolly as the answer you got before.

John Howell: It is more precise than the FSA. You are ahead there.

Jane Vass: In our sector, we have 350 Age Concern centres around the country, most of them offering some form of information and advice service. We are very aware that we need to prove to our funders the value that our centres are delivering, so our centres are developing ways of quantifying their value, for example, in terms of benefit take-up. We would hope and expect that benefit take-up would increase considerably, but it might also be possible even to come up with other measures, for example, a measure of the number of people making a will. There are quite a lot of smaller measures like that one that we can use as targets. Indeed, perhaps even budgetary savings could be measured. By taking a sort of subject-by-subject approach in our research, we certainly hope to demonstrate our worth.

Adam Phillips: We must remember that the FSA kicked this thing off only a few years ago and there is some evaluation going on. The next stage is to build a proper evaluative programme to track the short-term measures that we discussed to make change. That is quite feasible to do, and it should be built into the requirement for evaluating the performance of this body. Coming back to the point that I made earlier and that we have discussed, we must build into that evaluation a qualitative measure that the body is acting in an independent way and as an effective consumer advocate in areas where people need to be educated.

Q 163

John Howell: May I move on to a question about credibility? We touched on the credibility of the educational products of the new body and on the need for credibility in the board of the new body. We also heard that the FSA was intending to take the current educators in the FSA and move them lock, stock and barrel to the new body. Given the patchy nature of the success of its educational efforts over the past few years, does that really provide the credibility that the new body needs?

Adam Phillips: I find it hard to give a view on that because, as I said earlier, it is very difficult to run the body in the way in which we would like while we are part of the FSA. There are undoubtedly some good people doing good work. They have had the last couple of years of a large budget to spend, but it is difficult, given the fact that the primary focus of the regulator has been on issues to do with the system, not issues to do with consumer education, to see what they might be capable of if it were entirely up to them.

Jane Vass: May I pick up on confidence and financial stabilitythe issues to which the new body must have regard? I really believe that there should be a counterbalancing duty to act in the best interests of its users. Indeed, we have found that a lot of people have gone from the third sector, for example, into the Financial Services Authority, so the structural move of the whole body outside will be quite an important signal to users that it is an independent body. That is why it is very important that it should not have the word authority, for example, in its title. It can often put off people who are very reluctant and distrustful of authority.

Q 164

Andrew Love: I am curious. We have talked a lot about the changes that will be brought about by the Bill, but I am interested in the earlier comments, which were certainly made at the Treasury Committee, about the impervious nature of the Financial Services Authority to consumer interests, and whether or not the provisions in the Bill will take the FSA further away from the consumer interest and whether we should be thinking in the Bill about doing something to ensure that the FSA itself has a consumer voice within it. I would be interested to hear the views of the panel.

Adam Phillips: I think that we have been conscious since the beginning of this year of a change in the FSAs approach to meeting its objective for protecting the consumer interest. We have higher-level discussions that are more concerned with policy issues than we have had in the past, and we have seen a considerable change in its approach to enforcement and in its willingness to confront the industry on issues that we think are important. At that level, there has been a big change in the FSA.
The extent to which the change will be maintained in future if the climate moved back at some point towards being more favourable to a light-touch approach is not clear. If we look at what was happening three or four years ago, there was a lot of pressure on the FSA not to over-regulate, and we have seen the effect of that. I do not by any means think that the change is guaranteed but, as we have seencertainly in the past yearthere has been a very big change in the way in which the FSA has approached dealing with consumer protection.

Q 165

Andrew Love: But that, in a sense, has been a response to market conditions and the failures of regulation of the past. What I am getting at is that one of the things we are removing is the FSAs public awareness duty. Which? is a perfect example: you have called in the past for direct consumer representation on the board of the FSA. Should we at least consider ensuring that the FSA does not become less consumer-friendly as a result of the passage of the Bill? How could we go about doing that?

Peter Vicary-Smith: We have been encouraged by some change in attitudeor statement, if you like. We were pleased to see two individuals appointed to the board recently who come much more from a consumer perspective. We were disappointed that they were there as individuals and it was not a formal introduction. They are but two members of a board, although they are a voluble two, so perhaps they will have more than their fair share of air time.
We hope that it is not just window-dressing, because there are still some fundamentals in the FSAs activities that need to change. The biggest one for usso much of the problem stems from thisis around transparency and the narrow interpretation that the FSA has of its powers under the Financial Services and Markets Act to name those firms entering enforcement. We absolutely understand that the FSA would not want to name firms that are under some form of discussion or investigation, but when you are into enforcement, you have gone beyond that point.
We have to my mind what is a ridiculous casealthough that implies a degree of amusement, which is far from the situationin which four firms are going through enforcement over how they deal with mortgage arrears but, because they are not named, the judges who are looking at those firms repossession actions are unaware that the FSA has any problem with how they are behaving. What we shall end up with is what we had with that company that was named: people losing their houses because the judges at the time did not know that the firm was not behaving well. Enforcement came too late for those individuals.
We certainly feel that there is a case to say something. We took an opinion from Queens Counsel, which was that the FSA interprets its powers too narrowly. We have written to the Chancellor and others asking, in the pre-Budget report, for the formal instigation of a review of the FSAs interpretation of those powers. From that refusal to name firms that are causing problems in the market, in the name of ensuring the stability of those firms, we think so much else follows: so many of the problems of PPI mis-selling, or our difficulty in advising the consumers we interact with to avoid firms or a particular product. If the FSA was more proactive, a large part of the problems that we all see further down the line would go away.

Q 166

Andrew Love: May I come to Citizens Advice for a moment? A very positive statement was made by the chief executive of the FSA, about it taking more robust action to protect a consumer, among others. Yet, if I reflect on the decision not to name and shame, that would appear to suggest that the industry still has too much influence on FSA decisions. How does Citizens Advice look on that?

Peter Tutton: I think we would agree with that. More prosaically, the point about openness is important. We found two things with the FSA. First, it is still learning to regulate a lot of the things that we deal with: general insurance or PPI, together with mortgages, are two big areas of consumer detriment that it has taken on relatively recently.
Two things from PPI are instructive. First, when the FSA found problems in the market, its initial approach was to write to the firms and ask them to change. After a year, the firms had not changed. What we have seen is a progressive type of thingpeople saying, Okay, we have to do something a bit tougher. What would be useful for usand this is the pointis a measure to deal with the FSA not being tough enough.
The FSA approach was a bit like Sergeant Wilson from Dads Army saying, Would you mind awfully changing? rather than, You have got to change and be better. What triggers do people like us have to say to the FSA, No, you need to do more; there are still problems. There are no external triggers to make them do anything; they move at the pace they want to. When the in-fashion thing was light touch, the FSA was light-touch; now the fashion is more regulation, so there is more regulation. In a years time we could be back to light touch. Both those positions may be wrong; what we want is effective regulation when it is needed.
So, first, what are the external triggers to make that happen? Secondly, how open is the FSA? The FSA does an awful lot of good research work in its thematic reviews, but it does not say much about the outcomes. With the mortgage arrears thing, we know that they have taken a firm into enforcement for things such as treating people badly with arrears management and also for overcharging them for arrears charges. But we do not have a very public statement saying what is fair in arrears charging and what is not.
We think that there are thingsthis goes back to the public awareness point, the public education pointthat the FSA needs to be better at, informing consumers and people like us about what it is doing and the outcomes of what it is doing. If it says, This firm has been fined for overcharging people in arrears, and this is why we think they are overcharging, we can advise people we see and say, Look, you may be being overcharged as well, and we can complain about that.
What triggers are there to ensure that people like us, who get oversight from people like you, stay regulated? Also, how can we make FSA be more open and ensure that they actually say what they are doing, why they are doing it, and have they looked at things like mortgage arrears targets and if they have, what outcomes did they come to, and what do they propose to do next? It is about setting that agenda, so they cannot move along at the pace that suits where they are.

Q 167

Andrew Love: There have been many suggestions about things that the FSA could change, and no doubt a dialogue is going on with various organisations and individuals on how that should happen, but is there anything that we can do in this Bill to assist in that process? I would like to hear your comments.

Adam Phillips: Section 348 of the Financial Services and Markets Act 2000 is about the power that the FSA has to release information. There is always an argument about how far it can go in publicising information that it collects as a regulator and which may or may not be fair to put into the public domain. To give some clarity in that area would enable it, as an example, to give the names of companies that are going into enforcement. As Peter said, that would be a very big step forward.

Q 168

Andrew Love: Thank you. I turn again to Which? You said earlier, in relation to unsolicited or unrequested credit card cheques, that a tiny number of people seem to take up the offer. Let me act as devils advocate for a moment. Let us assume that those consumers are acting rationally. Even though they pay more and the terms are worse, when they look around, they find the offer better than anything else that they can find on the market because of their vulnerability. Why should we bother getting rid of unrequested credit card cheques?

Peter Vicary-Smith: There are a number of reasons, and two of them stand out. First, you have 296 million cheques going out every year that have details printed on them, and the fraud implications alone of that I would not like to contemplate. They are sent as a separate letter, so you do not know you are getting them until they come in the post, and a number of us are concerned about that dimension.
The second thing is the implications that that can have for individuals. For what you propose as devils advocate to be valid, there would have to be a conscious, planned decision for an individual that that was the best form of borrowing. That is not how it works with these cheques.

Q 169

Andrew Love: Do you have any evidence in that regard?

Peter Vicary-Smith: My colleagues here will have more direct evidence. To describe the psychological process, I think that they are designed to be much more for someone who is sufferingpossibly in debt, and certainly in financial hardship. A cheque arrives through the post, and you are able simply to fill it out for £1,500a large amountand to cash it. It is a temptation to see that as an easy way out, and I would argue that that is psychologically more important than the idea that it is a planned form of borrowing.

Q 170

Andrew Love: Perhaps whoever wants to respond further will take on board the point about unrequested credit card limits. I believe that it is much more important, and I suspect that it looms much larger. How important is it that we consider not only credit card cheques but credit card limits?

Peter Tutton: It is very important. Here is an example: a case from a CAB of a 70-year-old woman whose 81-year-old husband became ill with cancer. They were put into a cycle of supplementing their pension income by using credit cards. Every time they got to the limit, it was raised by the creditor, and they were also sent credit card chequesthis pattern of practices was mentioned earlierso they ended up horrendously in debt. You are right. The point about credit card cheques that was made by Peter is that people are being encouraged into borrowing, but they have not had time to think about it properly and it might be harmful to them. That applies even more so, I suppose, to credit card limit increases and limit increases on other running account credit products, including store cards and perhaps overdrafts.
A range of different credit products have a limit that can be raised by a lender unilaterally. We have seen case after case of peoples limit being raised, particularly when they are in financial difficulties. We see people slowly going into a spiral of more and more debt and then they get into using one credit card to pay down other credit cards, an overdraft or a loan and, before you know it, you are completely out of control. There is a pattern, and part of that is unsolicited increases in credit card limits, which means that people are getting more into debt and they are not being advised as to the risks of that. Often they are in financial difficulty and the credit card company is responding to that financial difficulty by saying, Well, have some more credit. There is a pattern of quite destructive practices.
As a general point, the unsolicited issue of credit is the kind of practice that we need to address if we want to deal with the debt levels we have seen over the past 10 years. So you are absolutely right that credit limits in running account creditcredit cards in particularreally need to be addressed urgently.

Peter Vicary-Smith: The response the industry will give you is, Actually, we use this. We give people a little bit of credit and when they show they can manage it we give them a little bit more, and its a safe way into having a credit history. What we are proposing does not prevent that practice at all. We are all suggesting that people are told, This is how we want to manage your account, so you can opt in to having your limit increased in this way. That is still perfectly acceptable and that would be permissible under what we propose. It is this other behaviour that would be outlawed. The truth is that that is where they make their money, so they do not want that bit outlawed.

Q 171

Andrew Love: May I turn to the consumer financial education body, because someone mentioned earlier the inadequacies of the previous FSA regime? There was a lot of discussion when the FSA was created by the Financial Services and Markets Act 2000 about how much of the funding available to the FSA should go into this areait was 1 per cent. or 2 per cent., and that bedevilled it. What can you produce with 1 per cent. or 2 per cent.? Nothing but a few pamphlets to be distributed around. Although the amount has increased over the years, the success has been to garner funding from other sections to wider your remit. What are your views about how we can have a sophisticated funding regime that will mean that this new body can rise to the challenge? There is a significant challenge in respect of what we are asking it to do in the longer term.

Jane Vass: Stability of funding is a key issue. Ad hoc figures that increase and decrease a lot from year to year are probably less easy to manage in terms of funding this sort of work than a stable funding stream, because the set-up costs of any financial education project can be high. It is important that the authority has the powers to take in funding from a wide range of sources, including the credit industry, to lever in funding from other sources, potentially, and to have a co-ordinating role to ensure that the money is used in the most efficient way by drawing together all the different strands of activity across the various bodies that are interested in this area.

Adam Phillips: It is the co-ordinating role that is important, because there is already a lot of money being spent, or being proposed to be spent, in this area and it should be joined up in an effective way.

Q 172

Andrew Love: On that pointI do not know if anyone has any viewsI was particularly concerned because the industry, clearly, will be a major funder for this project and that will probably start off reasonably well. However, if the industry feels that the challenge is such that it needs to increase the level of funding, I suspect that it will begin to be more difficult to persuade. How do we ensure we do not get bogged down in that sort of difficulty?

Adam Phillips: I think that the point that was made earlier about evaluating the performance of this agency is quite important, because the industry will fund it if the effect of the agency is to get people to use the industry. If they do start saving more and they do start buying protection, it has to be a very effective way of promoting the industry. So, one would assume that the two things are joined up. It is in the interests of consumers and it is also in the interests of the industryas long as there is competition.

Peter Tutton: My colleagues who work in this area say they have had long-standing relationships with some financial services providers. We have been working with Prudential for nine years, Barclaycard for six, and Nationwide and Abbey for three. So, there is clearly an appetite among financial services providers to work with people like us on financial education products. We have been working for them for many years and producing outcomes that work, which we then evaluate.
You are right that the industry will gripe if it thinks it is putting in money that has nothing coming out of it. On the other hand, there are clearly firms that see the benefit of this and are willing to invest money in it. In relation to that kind of co-ordination view, hopefully what we can do is to encourage more of that or lever in more money that will support the good work that these firms are doing. Probably key to how we evaluate it is that we have to demonstrate it is doing good stuff. It is a case of building on a willingness that is certainly already there.

Q 173

Mark Hoban: But is it not the case that what will happen is that businesses that currently fund your projects, Peter, on a voluntary basis, will now have to contribute through the levy? That will be an increased payment compared with the amount they currently pay to the FSA. They will say, Well, were paying enough. Were giving all this money thats going towards the CFEB so, CAB, were going to cancel your funding.

Adam Phillips: That is why the co-ordination approach is very important, because there is already quite a lot of money going into this and it is a matter of using it effectively. It should not be an either/or situation, to the extent that the bodies actually regard what the CAB is doing as a good job. It should carry on doing it and continue to get funding. I would not like to see a situation where we are simply switching funding from one organisation that is very efficient to one that might be very inefficient.

Q 174

Mark Hoban: But that is the potential outcome here, isnt it? Do you think that the Bill should be amended so that where people are making a voluntary contribution towards the initiative, they should be credited against their levy payment?

Adam Phillips: Well, that is not quite how it happens at the moment, but last year, I think, the FSA put £25 million into consumer education out of a total levy of whatever it wasa little more than 10 times that. So, in a sense that is how they are now being represented and how the money is being spent. The money may transfer, but that levy is in a sense already present within the FSAs budget.

Q 175

Andrew Love: I do think that careful thought needs to go into this. To take my own constituency, I have been to two different schools: one where HBOS is doing its bit for consumer education, and one where Barclays is. That is going on all over the country, and it is all done voluntarily. We see it as part of those firms overall effort to burnish their reputationunderstandably so. But what happens when you start to levy them to do that as a matter of course? Will they then say, Well, all that other stuff goes by the wayside? There needs to be some very careful consideration to make sure that we maximise the amount that is going into that area.

Peter Tutton: I suppose that the advantage of the levy is that it does give us stability, and it will also probably provide a greater resource. In terms of the credibility of the new organisationthis point was raised earlierwe would like to see a step change in the provision of consumer education and in the way that consumers can be helped better to understand financial products, so that they do not get into terrible difficulty with things like debt and mis-selling. That probably is not going to come about through putting in money here and there, welcome and productive though that is. Those are things that you need to balance against each other.

Adam Phillips: I also think that this issue is about an independent trusted source, which is something that an individual brand cannot necessarily provide. That is very important to rebuilding confidence in using the industry. If I were running that kind of business, I would be very interested in funding something that was genuinely independent, and that would draw people into our business who would otherwise not come in.

Jane Vass: May I also pick up one of the issues to do with smaller, voluntary funded schemes? Unless a large amount of money is devoted over a long period of time, too often the aim is to produce a particular resource that is easy and relatively cheap, without the follow-through. That is really where we need to turn this whole thing around, so that we have that co-ordination and can actually build it into the evaluation.

Andrew Love: Maybe we should have had someone from the National Union of Teachers here, because it is one of the major obstacles to further development of the consumer financial education sector. I take your point, and in an era when the industry has relied so strongly on incentivised sales processes, we need to get it to understand that creating confidence through consumer education will probably do it much more good in the long term than trying to sell through incentivised schemes.

Q 176

George Mudie: Some unkind people might look at key aspects of the Billsuch as the tripartite committee, for example, which did not work and which we are trying to make betterand they might say that what the Bill proposes is the same committee, but with a different name.
Jane, in your evidence you say that although the Financial Services Authority has done good work in putting financial capability on the map, an independent body is now needed. Given that an independent body is needed, some unkind people will say, in relation to the Bill, Well, they said we are taking this duty or responsibility away from the FSA and giving it to the new body, but the new body is embedded in the FSA. The staff will, the FSA assures us, be transferred lock, stock and barrel, and there is even mention of the Transfer of Undertakings (Protection of Employment) Regulations 2006 in the Bill. The FSA is appointing the board, and it is allowing the Chancellor to have a say in appointing a chair and a deputy. It is collecting the levyand charging the board for doing sosetting the budget and reviewing how efficient the body is. I asked the FSA how independent it regarded that to be. You would not have to be unkind to say that it does not sound very independent at all. Why are you so enthused about this new era in the field?

Jane Vass: That is one reason why we think the new body should have a duty to act in the interests of its users: to buttress that independence.

Q 177

George Mudie: You say that that independence has to be buttressed, but the FSA is appointing the board. The Committee has heard evidence assuring us that the appointment of the staff would be by public advert, coming through the FSA. I am not sure there is anything in the Bill that states that the board will actually sit down to interview and appoint staff. I presume that the human resources function in the FSA will do that. The whole thing appears to be an FSA body with a different name. Where do you think that independence is going to come from?

Jane Vass: I must admit that we had thought that it should be operationally independent of the FSA, and certainly that would include the HR function.

George Mudie: Have you seen something in the Bill that I have not?

Jane Vass: No. The other thing I would pick out is the annual plan. The body does have a duty to consult widely on the annual plan, including with consumers. Looking beyond the governance structure, the other reason why we think an independent body is necessary is that people externally see that sort of Government-led and regulator-led body and decide that it is another body that they do not want to engage with.

Q 178

George Mudie: I think that we can all agreeno, we could not all agreethat there is a strong case for an independent body, but I keep coming back to the question: is this what you call an independent body?

Adam Phillips: Perhaps I could cast a little light here. First of all, the people who have been working on this in the FSA do have a lot of knowledge, so it would be a pity to lose that. What you are really talking about is the leadership in this particularly area. Those in the leadership have to see themselves as independent champions of the consumer, and the question is whether the FSA appoints those kind of people.

George Mudie: It is a good question, isnt it?

Adam Phillips: Yes. Those people should be appointed by a Nolan process, so that there are independent people involved in the appointment. As I said about the Financial Ombudsman Service, which is similarly tied to the FSA, with that body they seem to have created a relatively independent board, which has caused them some stress at times. If they pursue the same process, it should be quite acceptable.
On the question of who else it would report to if it was not part of the FSA, you begin to look around and you can see that it could be aligned with the Department for Business, Innovation and Skills or the Treasury.

Q 179

George Mudie: May I just ask you about that because you have led me on to a very direct question? If we were setting this body up and we forgot the history of it, but knew that there was a lump of money that was going to be able to be levied on the industry to set it up, would you embed it in a Government Department or agency?

Jane Vass: I can answer that. In our response to the Thoresen review, we argued for an independent body to start with, but it was a pragmatic decision. I think that we have been consistent all along in wanting that independent body.

Q 180

George Mudie: In paragraph 17 of your evidence, you say that proposed new schedule 1A to the Financial Services and Markets Act 2000 must ensure that there is strong consumer representation. I think that is sensible advice or a sensible request. Does the Bill give you full confidence that that will happen?

Jane Vass: I think we would like specific consumer representation on the board. That is an area where we have raised some concerns.

Peter Vicary-Smith: We would like to see it written into the Bill.

George Mudie: Interesting.

Joe Benton: There appear to be no further questions. On behalf of the Committee, I thank each of you for attending and for your replies to the questions.

Ordered, That further consideration be now adjourned. (Mr. Mudie.)

Adjourned till Thursday 10 December at Nine oclock.